Venture Capital (VC) - A financial instrument needed for tech start-ups in Nigeria

Venture capital (VC) is financial capital provided to early-stage, high-potential, and growth startup companies. The venture capital fund earns money by owning equity in the companies it invests in, which usually has a novel technology or business model in high technology industries, such as biotechnology, IT and software. The typical venture capital investment occurs after the seed funding round as the first round of institutional capital to fund growth (also referred to as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company.

Venture capital is also associated with job creation accounting for 2% of US GDP. Every year, there are nearly 2 million businesses created in the USA, and 600–800 get venture capital funding. According to the National Venture Capital Association, 11% of private sector jobs come from venture backed companies and venture backed revenue accounts for 21% of US GDP.

History

A venture may be defined as a project prospective converted into a process with an adequate assumed risk and investment. With few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals and families. The Wallenbergs, Vanderbilts, Whitneys, Rockefellers, and Warburgs were notable investors in private companies in the first half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines and Douglas Aircraft, and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg founded E.M. Warburg & Co. in 1938, which would ultimately become Warburg Pincus, with investments in both leveraged buyouts and venture capital. The Wallenberg family started Investor AB in 1916 in Sweden and were early investors in several Swedish companies such as ABB, Atlas Copco, Ericsson, etc. in the first half of the 20^th century.

This very important financial instrument needed to bootstrap financing in the technology startup sectors, is very much nonexistence in Nigeria.

A few Ventures capitalist operating in Nigeria can be found in this link http://www.africainvestor.blogspot.com/, amongst them are:

Grofin: Focused on SME development

Sahel Capital: Sahel Capital is a fund manager and private equity firm focused on West Africa, the company focuses primarily on businesses operating in the agric. sector. The company recently raised $33 million for its Fund for Agricultural Finance in Nigeria (FAFIN) to invest in agribusiness SMEs across.

Addis Capital: mainly consumer goods, financial services, energy and real sector

Adlevo Capital: Technology companies mainly IT and card payment enterprises. . Adlevo has invested in primarily technology companies, and their portfolios in Nigeria include: Interswitch, Paga and Solo Phone. The company is based in Mauritius but has offices in Lagos, Nigeria. Adlevo presents a great opportunity for technology companies in Sub-Saharan Africa looking to commence operations and fund their growth.
African Capital Alliance (ACA): ACA is an independent investment firm focused on Nigeria and West Africa; it was formed in 1997 and has aggregated capital commitments of over $750 million so far. ACA invests in companies with high growth and return potentials and an experienced management team, ACA has invested in Cornerstone Insurance, eTranzact, BevPak Nigeria Limited and Swift Networks among others. ACA invests in primarily businesses looking to expand and grow

The latest not included is http//:404.ng. A new emerging venture capitalist firm specializing in financing mobile based startup ventures. Their interest is mainly Mobile tech startups. Amongst all the VC companies I reviewed, I found the 440.ng most interesting and most tailored to the Nigerian market. They are focused on a particular product portfolio and are very vast in mobile based business as a team.

However, kick starting a modified venture capital stream is going to be critical for the country’s young enterprising youths to benefit from this type of financing.

Modifying venture capital as known in the US and the western hemisphere will be necessary if this will form part of a financing mechanism to help leapfrog Nigeria into the technology world.

In modifying venture capital, we will have to look at our cultural setting; our style and use of funds, our idea of creating both wealth and service. In Nigeria, the predominant thought once money is in the hands of someone, is to go on a shopping spree buying consumables. So the consumerist tendencies in our national psyche must be studied in detail if venture capital will work in our clime.

The second most important modification is the value and quantum of money needed. The average fund needed to startup a novel tech business is within 40 to 100 thousand USD. Again, because savings is quite low in our clime, most startup may actually not have any seed fund. They just have an idea and a prototype product. So a venture capitalist in the Nigeria environment, may actually be providing the seed fund, the go to market know how, etc.

The third most important factor may be that the venture capitalist who wants to operate in this clime, will be ready to procure the needed expertise in procurements and personnel management, so that the VC provider instead of giving out cash to the entrepreneur, is rather providing tools, office space, paying staff salary, providing working capital for a set period of time when the business is expected to enter into its stable and steady state.

However the challenges our clime presents, what is clear is that the opportunities are here and abound. Those who will take the pains to enter into this sphere of financial provision will reap great benefits in return.

Suggestions to would be Tech entrepreneurs

For would be tech startups who want to take advantage of this emerging VC operators, the following might be of help;

·         Prospective beneficiaries from the emerging VC operators must be able to count the cost of their intended business. They must have an understanding of what there profit, operation cost and capital cost as well look like. Without having a clear business case, it is unlikely you can get anyone interested in providing financing for your take off.

·         An entirely solo startup may find it difficult to secure funding. VC operators will be most favorably disposed to those starting as a team. Tech startups that are like minded individuals collaborating within are more likely to complement and reinforce each other. Therefore a team of guys working together to build a product or a service are more likely to get funding more than a solo individual

·         The emerging mobile technology may get a better attention, as mobile businesses find it easier to penetrate the marker even more quickly

·         Electronics technology and products will also command attention, especially innovations in health systems, green energy solutions, fuel efficient innovations, security electronics especially IP based systems.

Well let’s keep in touch for our next edition.

Henry O Ohakwe

Telecoms and Security Systems Consultant